Southwest Airlines 2012 Annual Report Download - page 78

not to be associated with future travel, the Company has determined that the period revenue is recognized is the
period in which it has fulfilled its obligation under the contract signed with the particular business partner, which
is on a monthly or quarterly basis, upon sale, as the related marketing services are performed or provided. The
vast majority of these marketing services consist of the access granted, either monthly or quarterly, to various
lists of Southwest’s frequent flyer members. The estimated amount that is not associated with free travel is
recognized in Other revenue in the period earned. For AirTran, 100 percent of amounts received for credits sold
is also estimated to relate to free travel and is deferred until the associated travel award is flown.
Under its current program, Southwest continues to estimate the portion of frequent flyer points that will not
be redeemed. These estimates are based on experience in its previous program and expectations of customer
behavior given the rules of the current program. However, since the current program is still relatively new, these
estimates may result in significant future adjustments based on actual experience.
Goodwill and other intangible assets
As a result of the Company’s acquisition of AirTran on May 2, 2011, the Company has reflected Goodwill
on its Consolidated Balance Sheet in the amount of $970 million at December 31, 2012, representing the excess
of the fair value of AirTran’s assets and liabilities over its book value on the acquisition date. In addition, the
Company has recorded other intangible assets totaling approximately $123 million at December 31, 2012,
primarily consisting of leasehold rights to airport gates, take-off and landing slots at certain domestic slot-
controlled airports and certain intangible assets recognized as part of the valuation of AirTran. All of the
Company’s intangible assets are, other than goodwill, finite-lived and are being amortized over their estimated
economic useful lives. Goodwill is not amortized, but will continue to be tested for impairment at least annually,
or more frequently if events or circumstances indicate that an impairment may exist. The Company has selected
October 1st as its annual testing date for Goodwill impairment.
The Company applies a fair value based methodology in testing the carrying value of Goodwill for its one
reporting unit. Key assumptions and/or estimates made in the Company’s 2012 Goodwill impairment test
included the following: (i) a long-term projection of revenues, expenses, and cash flows; (ii) an estimated
weighted average cost of capital of 9.5 percent; and (iii) a tax rate of 38.5 percent. The Company believes these
assumptions are consistent with those a hypothetical market participant would use given circumstances that were
present at the time the estimates were made. However, actual results and amounts may be significantly different
from the Company’s estimates.
Future impairment of Goodwill may result from changes in assumptions, estimates, or circumstances, some
of which are beyond the Company’s control. Factors which could result in an impairment, holding other
assumptions constant, could include, but are not limited to: (i) reduced passenger demand as a result of domestic
or global economic conditions; (ii) higher prices for jet fuel; (iii) lower fares or passenger yields as a result of
increased competition or lower demand; (iv) a significant increase in future capital expenditure commitments;
and (v) significant disruptions to the Company’s operations as a result of both internal and external events such
as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation.
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